Editorial: Vat a take off

Aug 21 2014, 01:40 IST
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SummarySlashing VAT on ATF helps small-town India take off

A glance at the air traffic movement data shows how even today much of the country’s passenger throughput is concentrated in the metros and bigger cities. Indeed, small-town India

hasn’t really been a part of the explosion in passenger growth over the past decade partly because fares have been out of reach for most and connectivity very poor. Some of this is changing and could change significantly if more states decide to cut the value added tax (VAT) that airlines pay on aviation turbine fuel (ATF). At Bagdogra, for instance, the VAT is now zero as a consequence of which airlines have been prompted to increase the number of flights at the airport. The lower outgo on taxes has also given them some leeway to trim fares and the result has been a huge 64% y-o-y jump in passenger traffic in

April-May on the back of a 37% increase in the number of flights. The story at other smaller airports, where the governments have lowered the VAT on jet fuel, if not as spectacular, is nonetheless worth telling.

Going by the numbers, making a detour to these smaller airports seems to be paying off; SpiceJet last week kicked off a flight to Kathmandu from Kolkata but via Bagdogra. It is not surprising airlines want to tank up at these smaller airports because expenses on fuel account for close to half of their costs since taxes on ATF in India are among the highest in the world—globally, fuel accounts for 34% of costs.

For their part, state governments have clearly realised that simply having more airports or exempting airlines from landing and parking charges doesn’t help and that a lower VAT is any day a better bait. The average rate that states charge ranges between 20% and 30%, but several states have brought this down to levels of 5% or less; those that have already reduced the VAT are Chhattisgarh, Madhya Pradesh, Odisha and Jharkhand. Indeed, the spillover benefits from the higher traffic—the boost to employment—should more than compensate for the loss of revenues.

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